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Curious Cottage Competition

The Chronicle Herald published a report on Nova Scotia’s black-market cottage industry this morning, revealing that unlicensed, untaxed competition is forcing some landlords out of business. Interestingly, there is a subtext to the article: government policy has the potential to suppress otherwise healthy economic activity.

“Steven Hebb, general manager of Prince’s Inlet Retreat in Martin’s Brook, said there is a proliferation of unlicensed tourist accommodations, and the underground economy is driving businesses like his into the red.” According to a provincial Quality Visitor Services inspector, there were 700 unlicensed operators in 2006, a number that same source expects to be “much greater” in 2014. These black-market cottagers do not pay commercial property tax rates or utility rates, and because they’re essentially “underground operations,” they technically do not comply with local building regulations (although there is nothing to suggest they couldn’t or wouldn’t). In Martin’s Brook, located in the Municipality of Lunenburg, where Hebb’s rental units are located, commercial tax rates are nearly 150 per cent high than the residential rate, falling four cents and a half-penny short of $2 per $100 of value at $1.957, compared with $0.81 per $100 for resident property-owners.

Avoiding these costs is precisely how black-market cottagers outcompete Hebb, and those in a similar predicament. Hebb argues that Nova Scotia’s provincial government, in addition to municipal authorities, could fix this issue by cracking down on the unlicensed operators, charging them licensing fees, and collecting commercial tax revenue from their ventures. His solution, however, seems to ignore the problem: high tax rates, expensive license fees, and burdensome regulations discourage economic activity. Nova Scotia’s provincial government, and several municipalities that rely on the cottage industry to finance public services, are certainly losing tax revenue, but it isn’t because the authorities are failing to levy it; it’s because higher rates have the potential to discourage taxable economic activity. This is the essence of the Laffer Curve, which shows that tax revenue is zero when rates are either 0 or 100 per cent: without taxes, there is no tax revenue, and when the government takes 100 per cent of a business’s revenue, there wouldn’t be anybody willing to operate a business.

In other words, why not reduce commercial tax rates and unburden cottage operators? The very fact that there are at least 700 unlicensed operators, who, in the absence of disproportionately higher tax rates, chose to operate a cottage rental business, suggests lowering taxes would reduce costs and encourage entrepreneurship across the board, thereby generating more taxable economic activity (read: tax revenue, tax revenue, tax revenue). It has the potential to solve Hebb’s problem, and it would generate additional tax revenue for the provincial and municipal governments.

Furthermore, one of Hebb’s competitors charges nearly 40 per cent less per week for a rental unit–$1,200, instead of $2,000. This is a significant difference in cost, and if unlicensed operators can manage to reduce the price of renting a unit by that amount, it could also encourage tourists to visit Nova Scotia, thereby generating additional tax revenue for the provincial and municipal governments.

In light of Economic and Rural Development and Tourism Minister Michel Samson’s announcement last week that government would shift its attitude and “enable business experts to make more decisions and allow government to focus on improving the economic conditions for the private sector, social enterprises, and communities to thrive,” perhaps this is a useful start.